Once again Europe’s leaders have swooped into Brussels and vanished hours later without offering any clear way out of the pulsating crisis at hand.
French president Francois Hollande achieved his coup de theatre. The French media gently accused him of staging a choreographed spat with chancellor Angela Merkel over eurobonds, knowing that Germany will not share its credit card with the debtor states until there is a fully-fledged United States of Europe – anathema to France. Photo: AP
Greece scarcely made it on to the agenda. The hard decisions have been delayed until the next summit in late June. There was no agreement on use of the European bail-out fund (ESM) to shore up Club Med banking systems and take the strain off the sovereign states. [Do you suppose by chance they're short on funds? Are they kicking the can? . . . ~J]
Mario Draghi, president of the European Central Bank, said the EU is at a “crucial moment” in its history. “We have reached a point in which the process of European integration needs a courageous leap of political imagination in order to survive,” he said. Yet no such leap was in evidence. The eurozone is no closer to equipping itself with federal debt machinery and a genuine lender of last resort.
French president Francois Hollande achieved his coup de theatre. The French media gently accused him of staging a choreographed spat with chancellor Angela Merkel over eurobonds, knowing that Germany will not share its credit card with the debtor states until there is a fully-fledged United States of Europe – anathema to France. “While Germany sees eurobonds as the end point, we see them as the starting point,” said Mr Hollande.
His eyes are on France’s legislative elections in mid-June. He has already fudged campaign pledges to withdraw troops from Afghanistan. He risks haemorrhaging support to the Left Front of Jean-Luc Melenchon if he yields on calls for eurobonds, a “growth compact”, and an EU “Tobin tax” on financial transactions.
Officials at the Elysee fear a Red-Rose coalition if Mr Holland’s socialists fail to win an outright majority, evoking memories of Leon Blum’s Front Populaire in 1936 that set off a run on the French banking system and forced the country off the Gold Standard.
Yet, for all the posturing, there is no doubt that the fundamental dynamics of EU politics have changed, reflected in German headlines denouncing the French leader. Bild Zeitung accused him of “arrogance” and lamented the end of Franco-German condominium. “We once had the Merkzoy. Merkollande does not exist.”
Mr Hollande vowed to end the tradition of Franco-German stitch-ups and was true to his word. He plotted with Italy’s Mario Monti and Spain’s Mariano Rajoy before the gathering, relishing the revival of French leadership in a new guise. Germany’s Handelsblatt said he was acting as the “lawyer” of debt-stricken states, the champion of the Latin Bloc.
He made no attempt to maintain a Potemkin front of unity with Germany, going out of his way to stress points where they disagreed. For EU veterans, the spectacle was revolutionary.
Mrs Merkel was careful not to rise to the bait. She let the Dutch, Finnish, and Estonian leaders argue her case against eurobonds with vehemence.
EU officials hope that the real business of creating an “economic union” to match monetary union will start in earnest once the French and Greek elections are out of the way in mid-June.
They are betting that support for Greece’s anti-bail-out firebrand Alexis Tsipras will peel away as voters reflect on his contradictory promise to tear up the EU-IMF Memorandum and yet keep the euro. Europe’s Green leader, Daniel Cohn-Bendit – himself a star of the barricades in 1968 – accused Mr Tsipras of “deceiving the Greek people” with false hopes. Such criticisms sting.
The ECB can force Greece out of the euro at any time by cutting off emergency liquidity support (ELA) for Greek banks, now running at about €100bn. Germany’s Bundesbank hinted at such action on Wednesday.
Julian Callow, from Barclays Capital, said the ECB would not dare to take such a drastic step until explicitly ordered to do so by EU ministers. “We consider that highly unlikely at this stage,” he said.
Another month of EU stasis is unlikely to prove a winning formula. The eurozone’s manufacturing and service surveys for May were the worst in 35 months. “Truly dismal,” said Howard Archer from IHS Global Insight.
“The Greek exit effect is starting to take its toll on an already brittle eurozone economy,” said Nicholas Spiro, from Spiro Sovereign Strategy. The danger is no longer what will happen if Euroland unravels, but “what is happening”.
Marchel Alexandrovich, from Jefferies Fixed Income, said the markets expected nothing from the summit, and received nothing. Yet drifting for another month is risky. “Who is going to buy Italian and Spanish debt? These countries have been issuing short-term paper, but this is no way to fund a government and they are running into massive redemption risks next year as the IMF has begun to warn,” he said.
Italian and Spanish lenders have been using emergency funds from the ECB to buy sovereign debt, propping up their sovereign bond markets and offsetting capital flight as foreign investors pull out. Some are running low on funds, and many face losses on the bonds already bought now that Spanish and Italian yields have jumped to near 6pc.
The ECB could halt the crisis immediately if it was willing to act as a genuine central bank, taking the risk of sovereign default in Italy and Spain off the table entirely. This would mean massive bond purchases, accepting the risk on its own balance sheet rather than shuffling it off onto banks and further entwining the lethal nexus of weak lenders and weak states, each propping the other up.
That would require a fresh EU treaty to change the ECB’s mandate. No such discussion was held in Brussels this week.